With increased investor interest following project announcements from most of the US refining industry, we have published this 70-page primer on the US Renewable Diesel (RD) industry. In this report, we forecast supply/demand for both RD and related feedstocks through 2025, while also analyzing the economics for each new refining company project. In summary, we see a ~6x increase in North America RD production capacity to ~5B gallons by 2024 if all projects start-up on time, which would require a large increase in RD penetration rates in existing LCFS states as well as LCFS program adoption in several new US states and Canada. Based on our forecasts, we think that capacity utilization could become a challenge over the next few years (see Figure 2), even factoring in considerable demand growth (see Figure 1). We also believe that domestic feedstock availability could become constrained, if these supply forecasts play out, as shown in Figure 3 below. We see some combination of delayed project start-ups, increased domestic soybean crush capacity and imports likely being required to meet projected feedstock needs.

Finally, when it comes to conventional diesel markets, we think that regions with high RD penetration rates (e.g. California) could require incremental conventional diesel exports to clear the market, leading to a risk of lower diesel crack spreads. For example, RD is already 18% of transportation diesel consumption in California (and climbing), and biodiesel comprises another 7%. Bottom line, we think that RD represents a large growth opportunity, aided by government support, though the knock-on consequences of this supply growth need to be watched.

On the individual projects of our covered companies, Diamond Green Diesel (50% JV of OW-rated VLO and OW-rated DAR) remains most advantaged from a feedstock perspective, though a shift to more soybean oil with the expansions could narrow the advantage over time. For the new Mid-Continent entrants (N-rated CVI and N-rated HFC), we see diverging strategies: CVI took a quick hit, low cost optionality approach that seems fairly neutral to EBITDA. HFC pulled the trigger on multiple facilities at once, including a pre-treatment unit (for feedstock), which should lead to positive EBITDA, but likely less than originally planned at spot margin levels. For new West Coast entrants (UW-rated DK, OWrated MPC and N-rated PSX), feedstock sourcing will be critical. We see a potential reliance on more expensive imports, partially offset by lower transportation costs to today’s core end markets (California/Oregon), but with less flexibility to serve new LCFS markets. On DK, we await further details on its potentially unique camelina feedstock source. Finally, we highlight the risk of conventional diesel margin pressure from higher RD penetration rates in California: PBF 33% of total company capacity in California, CVX 30%, MPC 14%, VLO 9%, PSX 7%.